ANNUAL REPORT 1974 NORTH CENTRAL AIRLINES NORTH CENTRAL AIRLINES 7500 northliner drive, minneapolis, minnesota board of directors Hal N. Carr* Chairman of the Board and Chief Executive Officer North Central Airlines G. F. DeCoursin* President April Company (manufacturer and distributor of seasoned food products) Chan Gurney Retired Member Civil Aeronautics Board Samuel H. Maslon* Partner in law firm of Mas/on, Kaplan, Edelman, Borman, Brand & McNulty management Jay Phillips Chairman of the Board Ed. Phillips & Sons Co. (wholesale beverage distributor) Morton B. Phillips President Ed. Phillips & Sons Co. Joseph E. Rapkin Partner in law firm of Foley & Lardner H. P. Skoglund Chairman, Executive Committee North American Life & Casualty Company Bernard Sweet President North Central Airlines Kenneth B. Willett Chairman of the Board First Financial Savings and Loan Assn. of Stevens Point * Executive Committee Hal N. Carr . . .. . .. . ... . .. . ... .. Chairman of the Board and T. M. Needham .. . ........ Vice President-Ground Operations Chief Executive Officer J. F. Nixon .. .. . . . . .. . . ..... .. Vice President and Treasurer Bernard Sweet . ... . ... .... . ... .. . ...... ... ... . President John P. Dow .. .. . .. . . .. .. . .. . Vice President and Secretary Robert L. Gren . ... ... .. .... . . . Vice President-Maintenance G. F. Wallis . ..... . . ...... . Vice President-Flight Operations Charlotte G. Westberg . . . . Vice President-Staff Administration and Engineering Joseph W. Ettel . ........ ... . . ..... . ... Assistant Secretary George J. Karnas . . . .. .. ..... . Vice President-lnflight Service Raymond J. Rasenberger . ... . ..... .... . Assistant Secretary Daniel F. May . .... . ..... . . .. ..... , Vice President-Finance Walter E. Nielsen . . ...... . . . . .. .. . .. .. Assistant Treasurer Gowan J. Miller . . . . . . .. . . Vice President-Industrial Relations Michael D. Meyer . ........ .. ...... . ..... ..... . Controller David E. Moran . . ..... . .. ... Vice President-Traffic and Sales John W. Dregge . . . . .... .. . . .. .. .. Assistant to the Chairman STOCK TRADING: ANNUAL MEETING: REGISTRARS AND STOCK TRANSFER AGENTS: First National City Bank, New York, New York Northwestern National Bank Common stock and warrants Traded under symbol NCA First Wednesday in April (April 2, 1975) of Minneapolis Minneapolis, Minnesota New York Stock Exchange Midwest Stock Exchange Wausau, Wisconsin AUDITORS: Alexander Grant & Company highlights 1974 1973 Change OPERATING REVENUES $151 ,490,000 $127,983,000 18.4% OPERATING PROFIT ............................................. . $ 17,994,000 $ 12,001 ,000 49.9 EARNINGS BEFORE TAXES .......... ... . .................... . .... . $ 15,696,000 $ 9,210,000 70.4 NET EARNINGS ... . ........ .... ... ..... ...... .. . .. ..... . ...... . $ 8,204,000 $ 6,447,000 27.3 NET EARNINGS PER SHARE ................................ . ..... . 66 52 26.9 DIVIDENDS PER SHARE .... .. .... .. . . ............ . ............... . 10 5 100.0 WORKING CAPITAL FROM OPERATIONS ..... . .. . .. . ..... . . ... ..... . $ 18,784,000 $ 14,176,000 32.5 WORKING CAPITAL AT YEAR-END ............ . .. . .. . ....... . ... ... . $ 4,834,000 $ 4,654,000 3.9 RETAINED EARNINGS ...... .... .... . .. . .. . ... .. .... .. ..... . .. ... . . $ 27,044,000 $ 20,086,000 34.6 STOCKHOLDERS' EQUITY ........ .. .. ..... . .. . .. ....... . . .. . ... . . . $ 47,152,000 $ 40,611 ,000 16.1 PASSENGERS . ....... . .... . .. .... . ... . ... . . ... .. ........... . .. . . . 4,546,000 4,263,000 6.6 PASSENGER MILES .................... . .. . .. . ... . .... ..... . . .. . . . 1,060,865,000 1,011 ,525,000 4.9 CARGO TON MILES ............. . . . ... . . ........ ... .. . ......... . . . 12,585,000 13,394,000 -6.0 (North Central Airlines' 10K report to the Securities and Exchange Commission may be obtained without charge by writing to the Secretary of the Company.) about north central North Central Airlines is a regional scheduled carrier linking intermediate-sized cities with major metropolitan areas. Its principal function is to provide safe, dependable air transportation. Incorporated as Wisconsin Central Airlines in 1944, the company received its Federal operating certificate three years later. Scheduled service was inaugurated on February 24, 1948. When headquarters were moved to Minneapolis/St. Paul in 1952, the name was changed to North Central Airlines. Traffic grew steadily, setting a regional industry record by 1960 with one million .passengers, and then doubling every six years to reach four million in 1972. The company has operated profitably for 20 of the 21 years under present management. Its fleet of 50 jet-powered aircraft makes 600 departures a day over the 10,200-mile route system. Efficient passenger handling includes computerized reservations and automated ticketing. Now in its twenty-eighth year, the airline serves 90 cities- in 13 states and two Canadian provinces-including Chicago, Detroit, Cleveland, New York, Toronto, Milwaukee, Winnipeg , Minneapolis/ St. Paul, Omaha, Kansas City, and Denver. North Central's 3,360 dedicated employees offer the traveling public the highest type of regional airline service. 2 to our stockholders, employees and friends: We are pleased to report that 197 4 was the most profitable year in North Central's history. Net earnings reached $8,204,000, and record revenues exceeded $151 ,000,000. Over 4.5 million passengers were carried more than a billion passenger miles. With these achievements, the company maintained its position as the leader in financial performance among the regional airlines. North Central has the highest earnings before taxes, the largest retained earnings, and the best profit consistency-having operated profitably for 20 of the 21 years under present management. Considering the airline's solid overall financial condition and 1974 earnings, the Board of Directors continued its policy of paying an annual cash dividend. Stockholders of record February 17, 1975 received 1 O cents per share of common stock. The $151,490,000 in revenues were 18 percent ahead of the $127,983,000 in 1973. With operating expenses rising 15 percent and other expenses (primarily interest offset by interest income) decreasing, the 1974 earnings before taxes were $15,696,000. This is a 70 percent improvement over the $9,210,000 in the previous year. Although taxes nearly tripled-from $2,763,000 to $7,492,000-the company still earned $8,204,000, or 66 cents a share, compared with $6,447,000 and 52 cents a share in 1973. The record profit boosted North Central 's retained earnings to $27,044,000 in 1974 and stockholders' equity to $47,152,000. The company's .69 to 1 debt/ equity ratio is one of the best among the nation's 19 scheduled airlines. Passenger boardings for 1974 were a record 4,546,000, seven percent over the 4,263,000 the year before. Passenger miles reached 1,060,865,000 for a five percent increase. The 12,585,000 cargo ton miles reflect a six percent drop, partially due to a two-month suspension of air express. In operating performance, North Central again ranked with the top carriers in the industry. The airline completed 99.2 percent of the 28 million scheduled miles, and 83 percent of its flight arrivals were on time. Three of these OC-9 Series 50 fan jets are on order for Spring 1976 delivery. North Central's aircraft will carry 125 passengers and feature the wide-body look with completely new decor. The Civil Aeronautics Board awarded the company a new nonstop route between Winnipeg and Duluth/Superior, and service was inaugurated on October 27. With this 314-mile segment, North Central now has a 10,200-mile system serving 90 cities in 13 states and two Canadian provinces. Late in 1974, the company filed an application for a Chicago-New Orleans nonstop route. Only one of the two authorized carriers is operating nonstop service. The company estimates that 40 percent of its projected passenger traffic on this route would originate or terminate on North Central flights serving cities beyond Chicago. A CAB decision in the North Central Route Realignment case was released February 5, 1975. It gives the airline better scheduling flexibility between city pairs on its system. Three DC-9 Series 50 fan jets were ordered in 1974 for delivery in the Spring of 1976, and the company has an option to purchase three more later in that year. This " stretched " aircraft will carry 25 more people than the 1 DO-passenger Series 30 jet. North Central now has 19 DC-9-30s and 31 Convair 580 prop-jets in its SO-aircraft fleet. Two more DC-9-30s will be received this April and May. A variety of improvements were made in services and accommodations for passengers and shippers. Among these is the company's new $1-million air freight facility, added to the headquarters complex at the Minneapolis-St. Paul International Airport. Responsible corporate citizenship is demonstrated by North Central's social action programs. These promote human development, conserve natural resources, and help the company operate as a compatible neighbor. The financial and traffic records for 1974 are attributable to the dedication and efficiency of the airline's employees, the assistance of its stockholders and friends, and the loyalty of passengers who choose North Central. With this strong support, the company can meet the challenges of 1975 and achieve another profitable year. HAL N. CARR Chairman of the Board and Chief Executive Officer March 4, 1975 Sincerely, BERNARD SWEET President HAL N. CARR BERNARD SWEET 3 4 financial review Record net earnings of $8,204,000 were achieved by North Central in 1974, and revenues climbed 18 percent to reach $151,490,000. The airline retained its position as the leader among regional carriers in financial performance. Revenues increased for the twenty- seventh consecutive year. The $151,490,000 revenues for 1974 are $23,507,000 greater than the $127,983,000 in 1973. Operating expenses, including depreciation and amortization of $8,017,000, rose 15 percent to $133,496,000 from $115,982,000. The operating profit of $17,994,000 jumped 50 percent compared with the $12,001 ,000 the year before. Other expenses, primarily interest offset by interest income, decreased by 18 percent to $2,298,000 from $2,791 ,000. The $15,696,000 earnings before taxes were the highest in the regional industry and a 70 percent gain over the $9,210,000 in 1973. Even with income taxes of $7,492,000-nearly triple the $2,763,000 for the previous year- the resulting net earnings of $8,204,000 (66 cents per share) set a record high and were 27 percent ahead of the $6,447,000 (52 cents per share) in 1973. The Variance Analysis table at the right summarizes factors relating to the net changes in revenues and expenses from 1972 through 1974. Further data on the company's operations for the last five years is provided on Page 19. Total operating revenues climbed in 1974 and 1973. Scheduled passenger miles flown, up 60.3 million for 1974, added $7.4 million to passenger revenues. In 1973, scheduled passenger miles were 20.7 million under the previous year when extra traffic was generated by a strike against another airline serving some North Central cities. This reduction in passenger miles accounts for the $2.3-million drop in 1973 revenues. Fare increases were granted during the last two years to help offset the effects of increased fuel costs, overall inflation, and the passenger security program. As a result, revenue per scheduled passenger mile rose in 1974 and in 1973. These higher yields improved 1974 revenues by $12.3 million and 1973 revenues by $7.3 million. Public service revenues vary accord- ing to the Federal government formula for paying airlines to provide air transportation to small cities which cannot fully support such service. Cargo and other revenue gains show normal growth. Under operating expenses, new labor agreements reflect the rising cost of living. The increased wages and fringe benefits, together with higher payroll taxes, amounted to $7.1 million in 1974 and $4.8 million in 1973. A substantial jump of 64 percent in the cost per gallon of aircraft fuel added $5.2 million to 197 4 expenses. Inflation boosted the cost of parts, supplies, services, landing fees and rent in 1974. In early 1973, the Federal government required airlines to screen all passengers board ing flights. For North Central, the cost of providing this security amounts to $2 million a year. Normal cost increases prevailed for passenger service and promotion. Payments to members of the airlines' Mutual Aid Pact dropped by $1.3 million in 1973, compared with 1972, a year of prolonged strikes in the industry. These outlays were reduced by an additional $200,000 in 1974. The climb in interest income is the result of investing the company's surplus funds generated from oper- ations. Interest expense increased $300,000 in 1973 due to higher interest rates and more outstanding debt. In 1974, outstanding debt declined, but because of continuing high rates, interest expense remained constant. The income tax jump of $4.7 million in 1974 reflects the company's record earnings and the higher tax rate applicable because little investment tax credit was available, compared with 1973. The extraordinary gain on disposition of flight equipment added $1 million of nonoperating income to 1972 earnings. The final item in the Variance Analysis shows the gain in net earnings of $1 .8 million for 1974. The company's long-term debt to equity ratio is .69 to 1 and continues to be one of the best among the nation 's 19 scheduled carriers. The substantial increase in working capital from operations provided cash for short-term investments, averaging $9.7 million, which yielded $1 ,128,000 in interest income. In addition, the company implemented a program to repurchase up to 500,000 shares of the airline's own stock on the open market. This decision was made because the stock was selling at four times earnings and below book value. Some 150,900 shares had been acquired as of December 31 , 1974. North Central 's $27,044,000 in retained earnings, highest in the regional airline industry, is the result of profitable operations for 20 of the 21 years under present manage- ment. Stockholders' equity reached a record $47,152,000, the equivalent of $3.83 per share. VARIANCE ANALYSIS Net Changes NET EARNINGS 1974-1973 1973-1972 1974 .......... . .... ... . . .. .. . . . . $ 8,200,000 1973 . . . ... . ........ . ........... . 6,400,000 $ 6,400,000 1972 ....... . . ..... . . . . . . . ...... . 7,500,000 Change in net earnings . ... . $ 1,800,000 $(1 , 100,000) MAJOR FACTORS OF CHANGE: Operating revenues Passenger miles .. . . . . .. .. . ... . .. . Passenger fares ........ . .... . .. . . . Public service revenues . .. . . ..... . . Cargo and other revenues .. . .. . ... . $ 7,400,000 $(2,300,000) 12,300,000 7,300,000 2,500,000 500,000 1,300,000 1,200,000 Net revenue changes ........ . . 23,500,000 6,700,000 Operating expenses Labor and other payroll items .. . .. . . Cost of aircraft fuel .... .. . .. ..... . . Parts, supplies and services ....... . Landing fees and rent ....... . ..... . Security costs (passengers) .. .. .... . Passenger service and promotion .. . . Mutual Aid payments .. . . . . .. .. . . . . Other expenses . .... . . . .... . . .. . . . Depreciation . .. ...... . ......... . . 7,100,000 4,800,000 5,200,000 900,000 3,500,000 (1 ,000,000) 700,000 800,000 2,000,000 900,000 500,000 (200,000) (1 ,300,000) (400,000) 700,000 400,000 Net expense changes . . . .... .. . 17,500,000 7,100,000 Change in operating profit .. 6,000,000 (400,000) Nonoperating items Interest income and other . ... ... ... . Interest expense .... .. ..... . . .... . Income taxes . . ...... .. . . . .. .. . .. . Extraordinary gain-equipment ..... . 500,000 400,000 300,000 4,700,000 (200,000) (1 ,000,000) Net nonoperating changes . . ... . 4,200,000 (700,000) Change in net earnings . ... . $ 1,800,000 $(1 , 100,000) The price range of North Central common stock (from first to fourth quarter) was 4-25/a, 33/a-31/a, 35/a-2, 3-21/a in 1974 and 5-4, 5-35/a, 43/a-33/a, 41/a-2 in 1973. During this two-year period, the composite Airline Industry Stock Index declined from an average of 76.7 for the first quarter of 1973 to an average of 34.6 in the fourth quarter of 1974-a drop of 55 percent. North Central common stock was off 41 percent. Tentative arrangements have been made with major banks to finance the acquisition of the two DC-9-30 and three DC-9-50 fan jets on order. These jets are replacing Convair 580s, two of which were sold in 1974. More Convairs will be disposed of as tne new jets are delivered. Based on the airline's strong financial position and 197 4 earnings, the Board of Directors again declared an annual cash dividend. Ten cents per share of common stock was paid March 3, 1975, to stockholders of record February 17. Continuing its policies of sound money management and strict cost control, North Central expects to meet the challenges ahead and make 1975 another profitable year. traffic growth and performance North Central set new passenger traffic records in 1974 while contin- uing to rank among industry leaders in operating performance. By carrying 4,546,209 passengers, the company achieved a seven percent increase over the 4,263,231 passengers in 1973. Revenue passenger miles topped one billion for the third consecutive year, reaching 1,060,865,304-a five percent gain compared with the previous year. Complementing scheduled service, the airline operated 622 extra sections to carry an additional 20,084 passengers. The 447 charter flights accommodated 54,659 passengers. Destinations included popular vaca- tion ports in the Caribbean, several major Canadian cities, and numerous points in 35 states across the country. With passenger traffic at record levels and available seat miles up just six-tenths of one percent, the passenger load factor rose 4.3 percent to 49.3 percent. North Central completed 99.2 percent of its 28,212,672 scheduled miles for 1974. Of the 218,830 scheduled arrivals, some 82.8 percent were on time. The airline's performance has averaged 99 percent over the last 17 years. This achievement is particularly significant because of the severe, adverse weather conditions which prevail for many months over most of the 10,200-mile system. Outstanding operating performance contributed to the high level of passenger traffic. Another factor was the shortage of automobile fuel in the early part of 1974 and low highway speed limit whjch prompted many people to fly rather than drive. Softening of the general economy, however, led to reduced business travel by some depressed industries. Cargo was affected by the national economic decline. Cargo ton miles for 1974 totaled 12,584,535, down six percent from the 13,393,664 the year before. Freight ton miles were off less than one percent, express d rapped 42 percent because of its temporary suspension in July and August, and mail declined nine percent. The airline's progressive and exacting maintenance program, implemented by skilled mechanics, has proved its value. Again in 1974, less than one- tenth of one percent of the scheduled departures were cancelled for maintenance reasons and only 1.3 percent were delayed by mechanicals. North Central has grown dramatically over the years, and the company's 3,360 employees consistently prove themselves equal to the challenging demands of providing safe, depend- able scheduled air transportation. d ~ .. goo people make .afr airline great 5 6 new facilities and services Facilities for passengers and shippers were significantly improved through the combined efforts of North Central and the communities it serves. Foremost are the impressive new terminals in Duluth/ Superior and Thief River Falls and the company's new air freight facility, added to the headquarters complex at the Minneapolis-St. Paul International Ai rport. North Central 's $1-million air freight facility features an expanded storage area for in-transit freight. The large walk-in cooler improves handling of perishable items, and a new security area is now provided for international shipments. Half of the 30,000 square feet available will be used by North Central for air freight operations and specialized pilot training. The other half is being leased to another carrier. Second-level jet bridges highlight the futuristic Duluth/Superior terminal. The four-level structure offers a variety of passenger conveniences, from indoor parking to elegant dining. The $6.2-million building was dedicated in October. The new Thief River Falls terminal, part of a $5.1-million airport program, opened in August. It is 16 times larger than the 21-year-old wooden structure it replaces. A baggage claim section, spacious lounge, and concessions area are among the major attractions. Larger baggage claim facilities were completed at Grand Forks, Rapid City, Rochester, Madison and Lansing in 1974. Passenger service counters were renovated at Pierre, Rochester, International Falls, Alpena, Kalamazoo and Muskegon. Terminals are under construction in Marquette and Sault Ste. Marie, with completion scheduled for 1975, and renovations at Cincinnati are nearly finished. To further accommodate air freight shippers, North Central is operating out of new facilities at Madison, Lansing and Omaha. Also, an air freight customer service area has been added at Chicago O'Hare. Continuing its flight equipment modernization program, North Central has ordered three DC-9 Series 50 fan jets for delivery in the Spring of 1976 and has an option to purchase three more later that year. These "stretched" versions of the DC-9 will carry 25 more passengers than the 1 DO-passenger Series 30 now operated. DC-9-50 interiors will have the wide-body look and a com- pletely new decor featuring dramatic cabin lighting ; coordinated colors for fabrics and carpeting; fold-down center seats ; 15 percent more legroom ; and enclosed overhead luggage compartments. Fold-down seats are also being installed in the other DC-9s. On the three-seat side, passengers have the convenience of a table when the center seat is unoccupied. The airline currently has 19 DC-9-30s and 31 Convair 580 prop-jets in its fleet of 50 aircraft. Two more of the 1 DO-passenger fan jets will be delivered in April and May. " Quick Tickets", introduced just a year ago, are now available at North Central passenger service counters in 40 locations. This automated system produces machine-printed tickets in 10 seconds for passengers with advance reservations. A unique customer service, the Passenger Action Line (PAL), was begun last fall. Personnel in the Customer Relations Department act as ombudsmen, by telephone, for both passengers and North Central agents in the field to resolve travel problems and misunderstand- ings quickly and amicably. Although in operation just a few months, PAL is already a significant part of the airline's effort to show personal concern for its customers. The company's new $1.8-million DC-9 digital flight simulator for pilot training is scheduled to be operational this August. The simulator, located in the new air freight facility, employs a six-axis motion system synchronized with visual equipment to duplicate actual flight sensations. It permits realistic emergency training which cannot be performed in an aircraft. Briefing rooms for check pilots and students will be available, along with offices for simulator engineers. The simulator can be used for nearly all DC-9 pilot training, saving the company many hours of actual flight time, besides providing more complete training. During 1974, the maintenance department continued its efforts to have more work for company personnel to perform. Specialized equipment was installed for inspection of jet engines and components. Other acquisitions include new tooling, for the complete testing and overhaul of aircraft auxiliary power units, and another precision mill for machining metal parts. These improvements expedite production and allow closer control of reliability and costs. The computerized data base system called SCEPTRE is nearing reality. The cutover is scheduled to begin this September. The system is designed to provide "up-to-the-minute" information on the service records of all aircraft and components, the parts inventory, and maintenance work schedules. Through TV-type screens, and some hard-copy printers, personnel throughout the system will have immediate access to the real-time data that SCEPTRE accumulates. Ultimately, the system may be applied to other departments in the company. Through creative planning, North Central is making prudent use of its resources to improve the reliability and efficiency of its service to the traveling and shipping public. North Central's new $1-million air freight facility is part of the company's headquarters complex at the Minneapolis-St. Paul International Airport. Flight crew Coordinator, Flight Control Mechanic Station Agent Reservationists Flight Attendant Passenger Service Agents Food Service Manager and Chet ~ -- good people make .afT'" airline great 7 8 route development Winnipeg became the newest and northernmost city on North Central 's system when nonstop flights from Duluth/Superior were inaugurated on October 27, 1974. North Central now offers the first single-plane service between the Manitoba capital and several Minnesota, Wisconsin, and Michigan cities. With this 314-mile route, the airline's system now spans 10,200 miles. The Winnipeg route was awarded by the Civil Aeronautics Board (CAB) under an amendment to the 1966 Bilateral Air Transport Agreement between the United States and Canada. The amendment, which was formally ratified in May 1974, also authorizes Detroit-Montreal flights after 1978. The company has filed to serve that route via Toronto. In a decision issued February 5, 1975, the CAB ruled in favor of the company's request that its nine existing domestic route segments be redesignated as one. North Central sought the change to allow greater scheduling flexibility between city pairs on its system. Late in 1974, North Central filed an application with the CAB for a Chicago-New Orleans nonstop route and requested an expedited hearing because one of the two authorized carriers has suspended nonstop service. North Central is proposing three round-trip flights between the two cities with 1 OD-passenger DC-9 fan jets. If approved, the new service would generate about $8 million in revenues the first year, with an estimated $2.6-million operating profit. Approx- imately 40 percent of the projected North Central passenger traffic on this 840-mile segment would originate or terminate on the airline's flights serving 25 cities in Michigan, Wisconsin, Minnesota and North Dakota. The new route would provide these cities with single-carrier service to New Orleans for the first time. In addition, passengers from Milwaukee, Green Bay/Clintonville, Minneapolis/St. Paul, Grand Forks, Marquette and Grand Rapids would have new single-plane service to New Orleans via North Central. Four other applications for major nonstop routes are awaiting Board action to start proceedings. In 1974, the CAB denied the company's request for expedited hearings on the proposed Milwaukee-Philadelphia and Detroit-Boston service. The same action was taken earlier on Milwaukee-Denver and Detroit-New York. These four long-haul routes would generate about $25 million annually in operating revenues and $6 million in operating profit. Hearings on one or more of these filings are expected during 1975. In recent years, however, the Board had drastically curtailed the granting of new routes because of the adverse economic conditions of some carriers and the uncertain fuel situation. In the Detroit, Cleveland , Cincinnati- Atlanta case, all carriers' applications were denied by the Board, and one airline's appeal is pending. Nonstop service to Winnipeg was inaugurated from this new $6.2-mil/ion terminal at the Duluth International Airport. North Central is continuing to pursue its present applications, totaling 6,647 miles, and to evaluate new routes that would improve service to the traveling public and be economically beneficial to the airline. Principal cases now pending are summarized below: CHICAGO-NEW ORLEANS NONSTOP The airline requested an expedited hearing on this application because one of the two authorized carriers has suspended nonstop flights . North Central would provide the first single-carrier service for 25 cities in Michig an, Wisconsin , Minnesota and North Dakota. Eight of those cities would have single-plane service. Three daily round trips are proposed. (840 miles) MILWAUKEE-PHILADELPHIA NONSTOP New nonstop service has been proposed between Milwaukee and Philadelphia, providing single-plane service for 10 Minnesota and Wisconsin communities. Although two other carriers are certificated on the route, only one nonstop flight is available in each direction. (690 miles) DETROIT-BOSTON NONSTOP North Central would offer the first competitive nonstop service between Detro it and Boston and also the only single-plane service between Boston and seven Michigan cities, plus South Bend, Indiana, via Detroit. (632 miles) MILWAUKEE-DENVER NONSTOP North Central would provide the first competitive service in this market, with flights originating in cities east of Milwaukee. (908 miles) DETROIT, CLEVELAND, CINCINNATI-ATLANTA The CAB denied all app lications, and another carrier's appeal is pending. The company filed to serve Atlanta from Detroit and Cincinnati. (968 miles) MICHIGAN POINTS-DETROIT-NEW YORK This proposed authority would enable North Central to provide new, single-plane service through Detroit to New York City from ten Michigan cities. (501 miles) COLUMBUS, DAYTON, CINCINNATI- PHILADELPHIA NONSTOP The company's request to serve Philadelphia from Columbus, Dayton, and Cincinnati has been consolidated into the CAB 's Ohio/ Indiana Points Nonstop Service Investigation. (1,389 miles) TWIN CITIES-KANSAS CITY NONSTOP This application would permit North Central to operate nonstop flights in addition to the present two-stop service. (404 miles) DETROIT-MONTREAL, VIA TORONTO Authority to serve Montreal from Detroit, via Toronto , was requested under an amendment to the 1966 Bilateral Air Transport Agreement between the United States and Canada. With this route, North Central could also offer convenient single-plane service from Minneapolis/St. Paul and Milwaukee to Montreal. The amendment authorizes Detroit-Montreal flights by a U.S. carrier after 1978. (315 miles) NORTH CENTRAL ROUTE REALIGNMENT North Central 's request that its nine existing route segments be redesignated as one has been approved by the CAB. The airline now has greater flexibility for scheduling between city pairs on its system. social action programs An expanded, aggressive "Affirmative Action " program was implemented by North Central in 1974. The program, approved by the Federal Aviation Administration, complements the equal opportunity policy the airline has followed for many years. The company feels that Affirmative Action is vital to the successful conduct of business and to basic human dignity and welfare. This approach establishes goal-setting procedures to promote job oppor- tunities for women and minorities. Affirmative Action is a commitment to hire and advance minorities and women at an accelerated pace until employee totals reach parity with the workforce available at each location. North Central is conducting a vigorous recruiting drive to seek minority and female applicants who meet the airline's job standards. Some 30 minority organizations visited the company in 1974, and applica- tions are being received directly from minority employment agencies, colleges and vocational schools. The Affirmative Action program is providing benefits to North Central and the communities it serves- through fuller utilization and devel- opment of people's talents. The airline is making a concerted effort to establish mutually profitable business relationships with minority vendors who offer needed goods and services. The objective is to help these firms develop into stable enterprises that will be competitive and reliable suppliers for years to come. North Central has 3,360 employees, 90 percent of whom are represented by one of six unions. Negotiations are held in a positive atmosphere which contributes to reaching equit- the future North Central, having just completed the most profitable year in its history, looks forward to further traffic and revenue growth in 1975. Final results will reflect the airline's ability to capitalize on current market advantages and participate in the nation 's economic recovery. In the past year, reduced highway speed I imits, along with the scarcity and high price of gasoline, prompted many people to fly rather than drive. Federal programs to spur the economy should generate more business and pleasure travel, and able agreements while considering employee needs, the company's financial condition, industry develop- ments and the general economy. Du ring 1974, contracts were signed with three unions for two-year periods, and discussions are currently being held with two others. The sixth agreement expires in September 1975. The company believes that high employee morale is one of its most important assets. The excellent working relationship between management and contract employees is evidenced by the fact that North Central has never had a single day of work stoppage in its 27-year history. Fuel conservation measures at North Central saved 200,000 gallons of aviation fuel monthly-or nearly two-and-a-half million gallons in 1974. Revised flight procedures are an important part of this continuing program to conserve jet fuel. Among these are lower cruising speed, delayed use of landing flaps on approach, deferred engine-startup in the gate-hold area, reduced use of the auxiliary power unit, taxiing aircraft with one engine, conducting flight training in simulators when possible, and absorbing most departure delays at the gate. Additional steps taken to conserve fuel include selective equipment substitution, some schedule reduction, and curtailed extra sections and scenic flights. Thermostats in company buildings are at 68 for working hours and turned down to 60 in off-hours. General lighting remains at a lowered level which saved over three million watts in 1974. Numerous employee car pools are operating. " Waste Not" is the theme of North Central's new paper recycling vacationers are showing greater interest in taking domestic trips. Increased jet service always stimu- lates traffic, and North Central will be adding two new DC-9 fan jets to the Spring schedule. Freight volume is I ikely to improve as inventories dwindle and businessmen turn to air service for quick delivery rather than keeping large supplies on hand. program. About 60 percent of all paper material discarded at the airiine's headquarters can be recycled . In less than a year, 54 tons of material have been sent for reprocessing. To minimize the effect of aircraft noise on th e community, standardized flight procedures have been adopted . In addition, all jets on order will be equipped with acoustically- treated engine nacelles. On a more personal note, flight crews respond to distress calls whenever they can without jeopardizing the safety of their passengers. Recently, a private pilot whose aircraft had malfunctioning navigational aids was guided through overcast skies to safety. Last summer, a Northliner captain spotted and reported a disabled boat on Lake Michigan. The message was relayed to the U.S. Coast Guard, which towed the boat ten miles to shore. By word and deed, the airline is operating as a responsib le corporate citizen-and North Central people are carrying out social action programs with individual concern. Affirma tive Action Program assists minorities and women. structure ordered by the Civil Aero- nautics Board effective April 29, 1975. Current supplies of aviation fuel are adequate, although prices continue to climb at an accelerated rate. Other expenses are also rising, but at a more moderate pace. The company's 3,360 employees have proved themselves dedicated These combined factors, which and productive. Their efforts, influence the demand for air trans- combined with tight cost controls portation, are expected to increase and additional revenues, should revenues. Some benefit is also make 1975 another profitable year anticipated from the new fare for North Central. ~ -. good people make .atr airline great 9 SAULT STE. MARIE OUETTE I I I I I I I I I I I I I I I I I I I I I I I -------- -------- ------........ ----------------- ---~DELPHIA ~ -------=-- --------,_.:::...-::S------------ -------------- ----- --~ ------------ ---- ---- ---- --COLUMBUS - - - -- I ---- J--- -, INCll,NATI \ I PRESENT ROUTES_ \ I PROPOSED ROUTES __ _ \ I \ I \ I \ I \ I \I \I \I eATLANTA I I ROUTE OF THE NORTHLINERS NEW ORLEANS~ 12 NORTH balance sheet ASSETS CURRENT ASSETS Cash, including certificates of deposit of $512,000 in 1973 (note B) .. Short-term investments - at cost, which approximates market . .. . Accounts receivable, less allowances (note A) . . . . ... .. .. .. . .. . Flight equipment parts and supplies (notes A and C) . ... .. ...... . Prepaid expenses and other (note A) .... . . . . .. .. . ... . . .. . . .. . . PROPERTY AND EQUIPMENT - at cost (notes A and F) Flight equipment (note C) . .. . ... .... ...... . .. ... .... . ..... . . . Ground property and equipment . . . . . ... ... . .. . ... . ..... . . . .. . Improvements to leased property .. .. ... .. ....... ..... ..... . . . Less accumulated depreciation .. .. ......... . ... .. . . .. . ..... . Advance payments on equipment . . ... .. .. . .. . ..... .. .. . ... .. . DEFERRED CHARGES AND OTHER ASSETS Unamortized development and preoperating costs (note A) ... ... . Rentals and other (notes A, D and F) . . ........ . ... . ..... . .... . LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (note C) . . . ...... . .... .. .. . Trade accounts payable .. .. . .... .. . . ...... . . . .. . .. .... .... . . Interline payable and tickets outstanding (note A) .. .... ... . .... . . Accrued compensation and other expenses ... . .. .. .. .... .. .. . . Income taxes (notes A and J) ... ..... .. .. . .. .- ... . . . .. .. ...... . LONG-TERM OBLIGATIONS Long-term debt - less current maturities (note C) .... . ....... . . . Deferred income taxes (notes A and J) . .. .. .... . .. .. .. . . .. . .. . . Warrant obligation (note C) . .. ....... . . .. . . .. .. ..... .... . ... . COMMITMENTS (note F) STOCKHOLDERS' EQUITY (notes C, G and H) Common stock - authorized 16,000,000 shares of $.20 par value .. . Additional paid-in capital . ... . .... . .... . ... .. .. .. ... . .. . . . .. . Retained earnings ......... .. ... . .... .. . . ..... .. . .. . ....... . Less treasury stock - 150,900 sh ares at cost ..... . . . .. . . ..... . . The accompanying notes are an integral part of this statement. CENTRAL AIRLINES, INC. December 31 1974 $ 5,055,000 9,750,000 14,764,000 3,998,000 5,030,000 38,597,000 92,452,000 9,741 ,000 3,677,000 105,870,000 (36,962,000) 68,908,000 4,984,000 73,892,000 1,600,000 4,607,000 6,207,000 $118,696,000 $ 8,400,000 6,619,000 8,190,000 8,122,000 2,432,000 33,763,000 32,633,000 4,867,000 281 ,000 37,781 ,000 2,493,000 18,032,000 27,044,000 (417,000) 47,152,000 $118,696,000 1973 $ 3,458,000 8,987,000 13,910,000 3,331,000 4,478,000 34,164,000 93,853,000 7,623,000 3,612,000 105,088,000 (31,026,000) 74,062,000 2,262,000 76,324,000 1,814,000 2,759,000 4,573,000 $115,061 ,000 $ 8,097,000 7,277,000 6,457,000 7,363,000 316,000 29,510,000 42,172,000 2,504,000 264,000 44,940,000 2,493,000 18,032,000 20,086,000 40,611 ,000 $115,061 ,000 statement of earnings Years ended December 31 OPERATING REVENUES Passenger (note A) . .. .. . . . . .. . .. .. ..... . . .. .......... . . . .. . Freight and express ..... . ..... .. . . ........... . .... . . . .... . . Public service revenues (note I) . .. ..... . .. . ........ : .... .. . . . Mail ..... . .... . ...... . . . .... . ...................... . ..... . Non-scheduled service and other ........ . ..... . .. .. . . .. .. . .. . OPERATING EXPENSES Flying operations .. . .. . ........ . .... . . . .. .. . . ............. . Maintenance ..................... . . . .... .... ...... ..... .. . Aircraft and traffic servicing .. .. ........ ... ..... . . . . . ... . .... . Passenger service . . .. . . . . . .. . ... . ... . . . . . .. . ........ . . . . . . . Promotion and sales . . .. . ......... . ............ ... .. ... . .. . . General and administrative .. . . .. ... .... .... . . .. .... ... . . . . . . Other transport-related expense . .... . . .. . .. .. . .... . .. . ... ... . Depreciation and amortization (note A) ... . . .. ........ ........ . Operating profit . .. . . . .. . .. . . .. .............. . .. . .. .. . OTHER EXPENSES (INCOME) Interest expense ....... . .... . . .. .... . . . ............ . ...... . Less interest capitalized (note A) .. . ..... . ................... . Interest income and other - net .. . .. . .. . ..... . .............. . Earnings before income taxes .. . ...................... . INCOME TAXES (notes A and J) Currently payable .. . ............................ . .. . . . ... . . Deferred ..... . ............ . ...... . ..... . . . ........ . ...... . 1974 $124,007,000 8,158,000 12,126,000 2,041 ,000 5,158,000 151 ,490,000 38,077,000 20,983,000 34,923,000 9,028,000 13,912,000-- 7,179,000 1,377,000 8,017,000 133,496,000 17,994,000 3,868,000 341 ,000 3,527,000 (1,229,000) 2,298,000 15,696,000 5,348,000 2,144,000 7,492,000 NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,204,000 NET EARNINGS PER SHARE (note K) . . . . . . . . . . . . . . . . . . . $ .66 The accompanying notes are an integral part of this statement. 1973 $104,279,000 7,123,000 9,631 ,000 1,789,000 5,161 ,000 127,983,000 30,929,000 17,551,000 32,036,000 8,094,000 11,866,000 6,594,000 1,562,000 7,350,000 115,982,000 12,001,000 3,623,000 142,000 3,481,000 (690,000) 2,791,000 9,210,000 2,530,000 233,000 2,763,000 $ 6,447,000 $ .52 13 14 statement of changes in financial position SOURCES AND APPLICATIONS OF WORKING CAPITAL SOURCES From operations Net earnings .......... . .. . ... . ...... . ... . .. ... . . .. . ......... .. . . Charges to earnings not using working capital Depreciation and amortization (note A) ....... . ............ . .... . Deferred income taxes (note J) ........ . .. . ..... . . . . . .. . ...... . . Other .. . ...... .. .. . . .... . .. . . . . .. .. . . . .. .. .... .... .. .... . .. . Working capital provided from operations . . . .. ... . . .. . . .. . .. . Proceeds in excess of gain from property and equipment dispositions .... . Increase in long-term debt . . ...... .. ... . . . . . .. . ... . .. . . . ..... ... .. .. . Reduction of insurance receivable ... ........ .. . ... ... . . . .. .. .. .. .... . Other .. . ...... . ...... . .... . .. . ....... . ........ .. ... . ...... .... . . . . APPLICATIONS Additions to property and equipment ... .. .... .. ..... . ..... . ... . .. . . . . . Additions to deferred charges . ... . . . .... . ... ... .... . ..... .. . .. . . . . . . . Reduction of long-term debt . .. . .... .. .. . .... . ..... . .. . ... . ..... . .. . . . Purchase of treasury stock .... . . . ...... . .. .... .......... ... .. .. .. . . . Payment of cash dividend .... .. .. . . . . . ..... . . . ... . . ... . . . . . . . .... . . . Other .... . ... . ... . . . .. . .. . .. . ...... . . . . .. .. . ... . ....... . .. . . . . .. . . INCREASE (DECREASE) IN WORKING CAPITAL ... .. . . . . ... . Working capital at beginning of year .... .. . ...... .... . ........ . ... .. . . Working capital at end of year . ... . . ...... .. . . . . . .. ... ... .. . ... . .. ... . NET CHANGE IN WORKING CAPITAL ELEMENTS Increase (decrease) in current assets Cash and certificates of deposit . . . .. .. . .. . ..... .. .... ... .. . . . . . .. . . Short-term investments ...... . ......... ..... . . . . .. . . . . . . ... . ... .. . Accounts receivable .. . ... . .... . . . . . ... . ..... . . . .. .. ... . . .. .. . .. . . Flight equipment parts and supplies . .. . . ..... ..... .. . .. .. .... . . . . . . . Prepaid expenses and other . .. . . .. .... . . .. . .. ... . .. . ... . . .. .. .. .. . Net change in current assets . . . ..... ... . .... . . .... . . . .... .. . .. . Increase (decrease) in current liabilities Current maturities of long-term debt . .. ..... .... . . . . . . . .. ... . . . . . . . . . Trade and interline payables and tickets outstanding . .. ....... ........ . Accrued compensation and other expenses ... . . . . . . .. .. . ... . . . .. . . . . Income taxes .. ...... . .... . . ...... .......... ... . .. ... ... .. .. . .. . . Net change in current liabilities . .. .... . ... .. . .. .. . . ... ... . .. . .. . INCREASE (DECREASE) IN WORKING CAPITAL . . . . . . . . . . .. . tatement of changes in stockholders' equity Years ended December 31, 1974 and 1973 Common Stock Additional Shares Paid-In Issued Amount Capital Years ended December 31 1974 $ 8,204,000 8,017,000 2,363,000 200,000 18,784,000 1,061 ,000 19,845,000 5,881 ,000 2,582,000 9,539,000 417,000 1,246,000 19,665,000 180,000 4,654,000 $ 4,834,000 $ 1,597,000 763,000 854,000 667,000 552,000 4,433,000 303,000 1,075,000 759,000 2,116,000 4,253,000 $ 180,000 Retained Earnings (note C) 1973 $ 6,447,000 7,350,000 184,000 195,000 14,176,000 799,000 15,105,000 4,300,000 71 ,000 34,451 ,000 24,355,000 730,000 9,260,000 623,000 268,000 35,236,000 (785,000) 5,439,000 $ 4,654,000 $ (5,439,000) 2,487,000 2,825,000 596,000 (111 ,000) 358,000 1,022,000 2,579,000 (494,000) (1 ,964,000) 1,143,000 $ (785,000) Treasury Stock Shares Held Amount Balance at January 1, 1973 . . ..... 12,462,752 $2,493,000 $18,032,000 $14,262,000 $ Cash dividend (note H) ........ (623,000) Net earnings for the year ...... . 6,447,000 Balance at December 31, 1973 .. .. 12,462,752 2,493,000 18,032,000 20,086,000 Cash dividend (note H) . ..... .. (1,246,000) Purchase of treasury stock . .. .. 150,900 417,000 Net earnings for the year ...... . 8,204,000 Balance at December 31, 1974 ... . 12,462,752 $2,493,000 $18,032,000 $27,044,000 150,900 $417,000 The accompanying notes are an integral part of these statements. notes to financial statements December 31 , 1974 and 1973 Note A-Summary of Significant Accounting Policies- The company, regulated by the Civil Aeronautics Board (CAB), uses the Uniform System of Accounts and Reports for Certificated Air Carriers as required by the CAB, which are consistent with generally accepted accounting principles. The significant policies consistently followed by the company are: Flight Equipment Parts and Supplies: These are priced at average cost. An allowance for obsolescence ($551,000 in 1974 and $465,000 in 1973) is provided for parts expected to be on hand at the date the related aircraft are fully depreciated by allocating costs of repairable items over their useful lives. Prepaid Expenses - Engine Overhaul: Engine overhaul costs are charged to expense as incurred except for those overhaul costs in- cluded in the purchase price of Flight Equipment. The company reclassifies to a current prepaid expense the cost of those over- hauls estimated to be consumable within the next twelve months by reducing costs included in Flight Equipment ($2,175,000 in 1974 and 1973). Capitalized Interest: Interest is capitalized on funds associated with major project expenditures such as acquisition of flight equip- ment, construction of ground facilities and expenditures for route . development and preoperating costs. Capitalization of interest ceases when projects become operational. The capitalized interest is amortized over the useful lives of the related assets for financial reporting purposes but charged to current period expense for in- come tax reporting purposes. The effect on net earnings (after taxes) of capitalizing interest rather than expensing as incurred for financial reporting purposes was approximately $118,000 in 1974 and $29,000 in 1973. Depreciation: Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their esti- mated service lives on a straight line basis for financial and tax reporting purposes. Prior to 1968, accelerated depreciation methods were used for tax purposes. Flight equipment is being depreciated to residual values (15% of cost): Convair 580 based on a common retirement date of June 1979 and DC-9-30 based on 15-year lives. Deferred Charges: Expenditures for route development are deferred and amortized over the life of temporary certificates, or five years for permanent certificates. Aircraft preoperating costs are amor- tized over approximately eight years. Certain expenditures are expensed when incurred for tax reporting purposes. Passenger Revenues: Revenues are recognized when the transpor- tation service is rendered. Tickets sold by others and lifted by the company prior to December 31, are included in accounts receivable until payment is received. Tickets sold for flights on other airlines, for which reimbursement has not been made, and tickets sold by the company for their flights which are unused at December 31, are included in interline payable and tickets outstanding. Pension Costs: The company has pension plans for substantially all of its employees, and funds its current expense of normal costs and amortization of prior service costs over periods ranging from 25 to 40 years. Asset appreciation or depreciation is applied to the unfunded prior service cost. Pension funding is determined pri- marily by using the Unit Credit Method (note E). Income Taxes: The company uses the flow-through method of ac- counting for investment tax credit which reduces income tax ex- pense when the related liability is reduced. The company recognizes deferred income taxes resulting from differences in financial and income tax reporting (note J). Note B - Compensating Cash Balances - The company maintains compensating cash balances in connection with its long-term debt financing (note C) and for general operating purposes. Such bal- ances averaged approximately $2,000,000 during 1974 and 1973 and are not legally restricted. Note C - Long-Term Debt - Long-term debt at December 31 con- sists of the following: 1974 1973 Quarterly ins ta I lment notes (a) . . . . .. . . . .. .. $25,566,000 $31,247,000 Semi-annual installment notes (b) . . . . . . . . . . . 1,705,000 Semi-annual installment notes (c) . . . . .. .. .. . 13,800,000 15,000,000 Tota I due banks and insurance companies (d) . . .. . . . . .. . . 39,366,000 Semi-annual subordinated notes (e) . . . . . . . . . 900,000 Subordinated convertible debentures (f) . . . . . . 690,000 Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,000 Total long-term debt .. .... . ... . .... . . 41,033,000 Less current maturities (g) . . . . . . . . (8,400,000) $32,633,000 47,952,000 1,500,000 692,000 125,000 50,269,000 (8,097,000) $42,172,000 (a) Payable as follows: a regular quarterly payment of $1,420,000 plus interest, in January 1975, and a required prepayment of $1,058,000 plus interest, in March 1975 resulting from the sale of two CV-580 aircraft which were collateral for the obligation; the remainder in quarterly installments of $1,358,000 plus interest, from April 1975 through April 1976 and alternating quarterly install- ments of $1,358,000 and $1,811,000 plus interest, from July 1976 through October 1978; interest at 7%. (b) Fully paid in November 1974; effective rate at December 31, 1973 was 11 %. (c) Payable in semi-annual installments of $600,000 plus interest, through July 1978 and quarterly installments of $2,250,000 plus interest, from January 1979 through October 1979; interest at % above bank's prime rate; effective interest rate at Decem- ber 31 was 10%-11 % in 1974 and 10% in 1973 (note B). (d) Total due banks and insurance companies is collateralized by substantially all flight equipment and spare aircraft parts owned by the company. Two equipment manufacturers partially guarantee these loans. Included in the loan agreement provisions are restric- tions on dividend payments, capital expenditures, additional bor- rowings and requirements related to minimum working capital and net worth. The company has a commitment to retire 259,511 war- rants at $1.50 per warrant within 30 days after the expiration date of October 31, 1979 for any of these warrants not then exercised. These warrants were issued to loan holders in consideration of de- ferring certain debt repayments. The obligation is being accrued as additional interest expense through 1979. (e) Payable in semi-annual installments of $300,000 plus interest at 7% through March 1976. Stock purchase warrants issued in con- nection with this debt enable the holders to purchase a total of 200,000 common shares (note H). (f) Convertible into common shares at $8.55 a share to maturity, June 1, 1978; interest at 5%. (g) Current maturities of all long-term debt due in each of the next five years following December 31, 1974 are as follows: 1975 ....... . ....... . . . ... . .......... . ....... . 1976 ..... . .... . .. . . . . . ................. . .... . 1977 . . .. .. ...... . . .. ...... . .. . . . . . ... . ..... . . 1978 . . .... . ... . ........... . ......... . . . ..... . 1979 .. .. ..... . .. . . . . .. .. . . ... ... . . . . ... . . . . . . $ 8,400,000 7,867,000 7,538,000 8,228,000 9,000,000 $41,033,000 Note D - Investment Leasing - During 1974, the company entered into lease agreements as a lessor. These leasing activities are recorded under the finance method of accounting. At December 31, 1974, investment in leased equipment, net of the $1,500,000 note, totals $1,255,000, which includes estimated residual values of $267,000. - Under the terms of a leverage lease transaction, the company re- ceived approximately $1,500,000 on a 10% note and has assigned future lease payments and the associated equipment, costing ap- proximately $1,880,000, as collateral. The loan agreement provides that the company's liability is limited to its remaining investment in this equipment. The 10% note is recorded as an offset against the receivable from lessee. 15 16 notes to financial statements December 31, 1974 and 1973 (continued) The leases contain renewal options and transfer essentially all costs of ownership to the lessees. Note E - Pension Costs - Total pension expense was $4,150,000 for 1974 and $3,014,000 for 1973. At January 1, 1974, th'e latest actuarial valuation date, the actuarially computed value of vested benefits for all plans exceeded the total market value of fund assets by approximately $5,523,000. Changes in funding methods for cer- tain of the plans did not have a material effect on pension expense for 1974. Market value declines and improvements in benefits ac- count for the major portion of the increase of vested benefits over the market value of fund assets. The Pension Reform Act of 1974 is not expected to have a sig- nificant future effect on the amount of the company's pension ex- pense, funding or unfunded vested benefits. Note F - Commitments - Total rent expense, including landing fees, was $12,876,000 in 1974 and $12,177,000 in 1973, including rentals under "financing leases" (as defined by the Securities and Exchange Commission) of $6,375,000 in 1974 and $6,523,000 in 1973. The company has lease commitments for various airport facilities based upon usage and landings, subject to adjustment depending upon the needs of the airport operating authority. These leases ex- pire over varying periods, and future annual lease commitments are not determinable due to the usage and adjustment factors. At December 31, 1974, the company's minimum rental commitments under non-cancellable leases with initial or remaining terms of more than one year were as follows (in thousands of dollars): DC-9-3O CV-58O Computer Period Aircraft Aircraft Equipment Facilities Other Total 1975 $2,088 $1,715 $1,227 $1,634 $283 $ 6,947 1976 2,088 392 1,227 1,634 283 5,624 1977 2,088 1,227 1,634 215 5,164 1978 2,088 1,227 1,634 48 4,997 1979 2,088 1,023 1,634 28 4,773 1980-1984 4,045 8,170 28 12,243 1985-1989 8,105 8,105 1990-1994 7,500 7,500 1995-2000 3,852 3,852 The lease commitments for CV-580 aircraft and various facilities included in the above tabulations reflect both the current period expense and the rental prepayment required under the terms of the leases. Since the DC-9-30 leases are related to the prevailing prime interest rate, the 1974 expense was approximately $600,000 in excess of the minimum commitment. Nearly all leases contain renewal or extension options which are to be negotiated within specified periods prior to the expiration of the leases. The present value of the noncapitalized financing leases and the related interest rates at December 31 are (in thousands of dollars): Interest Rate 1974 Five DC-9-30 aircraft ................ 6% .. . . . . $11,520 Nine CV-580 aircraft ................ 5 % . . . . . . 2,344 Co~~~ter equipment . . . . ........... 8 % . . . . . . 5,050 Fac1l1t1es ....... .. .. ... ........... 4% .. . ... 16,436 Other ...... .. .. . ....... . .... . . ... 6 % . . . . . . 724 Total ....... .. . ........ .. . . .. . . ... .... $36,074 1973 $12,828 3,611 5,628 16,909 ~ $40,005 The impact on net earnings by capitalization of such leases would have been immaterial. The company, regulated by the CAB, is un- able to determine what impact the above capitalization might have on the rate base and any consequent rate adjustments. At December 31, 1974, the company had purchase commitments on two new DC-9-30 aircraft and three new DC-9-50 aircraft for which it has ~~vanced $3,638,000 and capitalized interest of $216,000. ~n. add1t1onal $29,~61,000 will be expended by the company in ful- filling these commitments. The two DC-9-30 aircraft are scheduled for delivery in April and May, 1975 and the three DC-9-50 aircraft are to be delive~ed in 1976. The total purchase price of $32,799,000 could be adJusted upwards since it is based upon an agreement which allows for changes in specifications. In addition, the com- pany also purchased an option for $75,000 to buy three additional DC-9-50 aircraft. If this option is exercised prior to May 1975, the total purchase commitment for the three aircraft would be an additional $21,673,000 and would be expended prior to delivery in December 1976. A spare engine for the DC-9-50 aircraft, with a cost of $588,000, is scheduled for delivery in March 1976, for which the company has advanced $29,000. At December 31, 1974, the company had a purchase commitment for a digital flight simulator and visual system for Douglas DC-9 aircraft which amounted to $1,750,000 of which $984,000 had been paid in advance deP,osits. The company has capitalized interest of $42,000 on these deposits. The scheduled delivery date is July 1975. Under provisions of the Mutual Aid Agreement, the company would pay struck carriers who are a party to this agreement. The com- pany would receive such payments in the event of a strike by its employees. Note G - Stockholder Disclosure of Ownership - The company is required by 245.16 of the Civil Aeronautics Board Economic Regu- lations to include in its annual report to stockholders the following notice: (1) Any person who either owns, as of December 31, of the year preceding issuance of such an,nual report, or subsequently ac- quires, beneficially or as trustee, more than 5 percent, in the aggregate, of any class of the capital stock or capital of the air carrier, shall file with the Board a report containing the infor- mation required by 245.12, on or before April 1, as to the capital stock or capital owned as of December 31, of the pre- ceding year, and in the case of stock subsequently acquired, a report under 245.13, within 10 days after such acquisition or ownership; (2) any bank or broker covered by (1), to the extent that it holds shares as trustee on the last day of any quarter of a calendar year, shall file with the Board, within 30 days after the end of the quarter, a report in accordance with the provisions of 245.14; and (3) any person required to report under this subpart who grants a security interest in more than 5 percent of any class of the capital stock or capital of the air carrier shall within 30 days after granting such security interest file with the Board a report containing the in_ formation required in 245.15. The notice shall also state that any stockholder who believes that he may be required to file such a report may obtain further information by writing to the Director, Bureau of Operating Rights, Civil Aero- nautics Board, Washington, D. C. 20428. Note H - Common Stock - Under a qualified plan, 350,000 shares of unissued common stock were reserved for officers and key em- ployees. When options are exercised, the excess of the option price over par value of the shares is credited to additional paid-in capital. The company makes no charges to income in connection with the shares issued under the stock option plan. Options Outstanding Option Price and Fair Market Value at Date of Grant Year Year Per December 31, 1974 December 31, 1973 Granted Exercisable Share Shares Amount Shares Amount 1969 1969 $4.125 - $ 18,000 $ 74,250 1970 1970 4.125 47,500 195,937 1970 1970 3.25 95,000 308,750 105,000 341,250 1971 1971 3.1875 36,100 115,069 38,050 121,284 1972 1972 6.375 2,500 15,937 1973 1973 4.25 31,875 7,500 31,875 1974 1974 3.375 8,525 28,772 1974 1974 2.75 23,925 65,794 1974 1975 2.75 45,000 123,750 1974 1977 2.75 2,500 ~ 218,550 $680,885 218,550 $780,533 Options exercised 131,450 131,450 350,000 350,000 All options granted expire five years after date of granting. There were no additional options available for granting as of December 31, 1974 or 1973. At December 31, 1974 and 1973, there we.re outstanding warrants to purchase 2,649,061 shares of common stock. These warrants resulted from public offerings prior to 1973 and from financial transactions as discussed in note C(d) and (e). All warrants enable the holder to purchase common stock at $5.50 per share and must be exercised by October 31, 1979. During January 1975, the Board of Directors declared a $.10 per share dividend payable on March 3, 1975 to shareholders of record on February 17, 1975. The company paid cash dividends to its share- holders during the first quarter of 1974 and 1973, of $.10 and $.05 per share, respectively. Note I - Public Service Revenues - As a local service carrier, the company receives public service revenues for serving small and intermediate size communities which do not generate sufficient traffic to fully support profitable air service. The amount of such payments is determined by the CAB on the basis of its evaluation of the amount of revenue needed to meet operating expenses and provide a reasonable return on investment with respect to eligible routes. The amount so determined is reduced by a portion of the company's earnings on routes not eligible for public service reve- nue. The CAB adopted Class Rate VII effective as of July 1, 1973. It provides for semiannual review of the company's public service revenue rate and has no specified expiration date. Note J - Income Taxes - Income tax expense for the years ended December 31 is made up of the following components: 1974 Currently payable income taxes Federal .............................. $7,214,000 Investment tax credit . . ................ (2,798,000) 4,416,000 State and local . . . . . . . . . . . . . . . . . . . . . . . . 932,000 5,348,000 Deferred income taxes Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000 Investment tax credit .................. 1,933,000 2,123,000 State and local . . . . . . . . . . . . . . . . . . . . . . . . 21,000 auditors' report Alexander Grant & COMPANY CERTIFIED PUBLIC ACCOUNTA NTS Stockholders and Board of Directors North Central Airlines, Inc. 2,144,000 $7,492,000 1973 $4,413,000 (2,275,000) 2,138,000 392,000 2,530,000 396,000 (200,000) 196,000 37,000 233,000 $2,763,000 We have examined the balance sheet of North Central Airlines, Inc. (a Wisconsin corporation) as of December 31, 1974 and 1973, and the related statements of earnings, changes in stockholders' equity and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The income tax expense of $7,492,000 in 1974 and $2,763,000 in 1973 (effective rates of 47.7% and 30.0%, respectively) are less than those expected to result by application of the Federal income tax rate of 48% to income before taxes. For the years ended December 31, the reasons for these differences are: 1974 1973 Computed "expected" tax expense . . ... ... . ... $7,534,000 Increase (decrease) in income taxes Investment tax credit utilized . . . . . . . . . . . . (865,000) State and local income taxes . . . . . . . . . . . . 953,000 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130,000) Actual tax expense . ........................ $7,492,000 $4,421,000 (2,475,000) 429,000 388,000 $2,763,000 The deferred income taxes resulted from the reversal of pre- viously deferred investment tax credit and the tax effect of the following timing differences for the years ended December 31: 1974 1973 Increase (decrease) in deferred income tax expense Excess of tax over book depreciation ....... . $ 98,000 Interest capitalized for book, not for tax . . . . . . 181,000 Vacation pay expensed for tax, previously expensed for book . . . . . . . . . . . . 86,000 Amortization for book ,of items already expensed for tax Training and development . . . . . . . . . . . . . . (248,000) Extension and development . . . . . . . . . . . . . (73,000) Capita I ized interest . . . . . . . . . . . . . . . . . . . (56,000) Gain on sale of equipment . . . . . . . . . . . . . . . . . . (59,000) Lessor leasing activities . . . . . . . . . . . . . . . . . . . 61,000 Deferred investment tax credit ... ........... 1,933,000 Adjustment to previously deferred tax . . . . . . . . 221,000 $2,144,000 $ 71,000 43,000 48,000 (140,000) (40,000) (30,000) (41,000) 322,000 $233,000 The company has no remaining investment tax credit available to offset future income taxes payable. Note K - Net Earnings Per Share - Net earnings per share is based on the weighted average number of shares outstanding for the year (12,431,869 in 1974 and 12,462,752 in 1973). Conversion of de- bentures into common stock, exercise of stock options and warrants to purchase stock would not result in material dilution of net earn- ings per share for the years ended December 31, 1974 and 1973. Note L - Reclassifications - Certain of the 1973 figures have been reclassified where appropriate to conform with the financial state- ment presentation used in 1974. MIDWEST PLAZA BUILDING MINNEAPOLIS, MN 55402 FIRST NATIONAL BANK BUILDING ST. PAUL, MN 55101 INTERNATIONAL FIR M ALEXANDER GRANT TANSLEY WITT In our opinion, the financial statements referred to above present fairly the financial position of North Central Airlines, Inc., at December 31, 1974 and 1973, and the results of its opera- tions and changes in its financial position for the years then ended, in conformity with generally accepted accounting prin- ciples applied on a consistent basis. Minneapolis, Minne~ c;,J 1~0 February 17, 1975 17 NT (MILLIONS) (BILLIONS) (BILLIONS) 1.05 - - - - - - ----l 2.00 - - - - 4.25 - - - - ' .95 - - -- 1.75 - 4.00 - - - -i .85 - - 1.50 - .75 - 1.25 - five-year summary EARNINGS OPERATING REVENUES 1974 1973 1972 1971 1970 Passenger ............ .. ............ .. . $124,007,000 $104,279,000 $ 99,260,000 $ 83,821,000 $ 76,954,000 Public service revenues ........ . . . . .... . . 12,126,000 9,631 ,000 9,090,000 6,885,000 5,131 ,000 Other ....... . ........ . .. . . .. . . . . ... ... 15,357,000 14,073,000 12,903,000 10,905,000 10,345,000 151 ,490,000 127,983,000 121 ,253,000 101,611,000 92,430,000 OPERATING EXPENSES Flying operations and maintenance . . . . .... 59,060,000 48,480,000 46,732,000 43,360,000 39,133,000 Other operating expenses .. . . . . ..... . . ... 66,419,000 60,152,000 55,176,000 45,196,000 38,353,000 Depreciation and amortization . ... . . .. .... 8,017,000 7,350,000 6,990,000 7,240,000 6,779,000 133,496,000 115,982,000 108,898,000 95,796,000 84,265,000 OPERATING PROFIT . . . . . ... . ..... . . . ... . . 17,994,000 12,001 ,000 12,355,000 5,815,000 8,165,000 OTHER EXPENSES (INCOME) Interest expense . . . . . . .. . ... . .... . .. . ... 3,868,000 3,623,000 3,229,000 4,252,000 5,055,000 Capitalized interest ... .. . . .... . . . . .... . .. (341 ,000) (142,000) (14,000) (23,000) (156,000) Interest income and other-net . . ........ . . (1 ,229,000) (690,000) (256,000) (183,000) 20,000 2,298,000 2,791 ,000 2,959,000 4,046,000 4,919,000 EARNINGS BEFORE TAXES . . ... . .. . . . . . . .. 15,696,000 9,210,000 9,396,000 1,769,000 3,246,000 Income taxes ... ... .. ..... .. ..... . . . . . .. 7,492,000 2,763,000 2,903,000 544,000 451 ,000 EARNINGS BEFORE EXTRAORDINARY GAIN AND ACCOUNTING ADJUSTMENT . ... .... 8,204,000 6,447,000 6,493,000 1,225,000 2,795,000 Extraordinary gain on disposition of equipment (net of income taxes) . ...... 1,043,000 Prior years' adjustment due to accounting change (net of income taxes) . . .... . . . (617,000) NET EARNINGS .. . . . . . ... .. . . . . . .. ... ... . $ 8,204,000 $ 6,447,000 $ 7,536,000 $ 1,225,000 $ 2,178,000 NET EARNINGS PER SHARE ..... . . $.66 $.52 $.60 $.11 $.21 DIVIDENDS PER SHARE . ...... . ... $.10 $.05 BALANCE SHEET ITEMS Current assets . .. .. . .. . ... .. . . ... . .. . . .... $ 38,597,000 $ 34,164,000 $ 33,806,000 $ 25,725,000 $ 24,606,000 Working capital from operations .. . . . .. . . .. .. $ 18,784,000 $ 14,176,000 $ 14,263,000 $ 9,204,000 $ 9,980,000 Working capital at year-end . . . ... .. ... . .... . $ 4,834,000 $ 4,654,000 $ 5,439,000 $ 3,900,000 $ (8,368,000) Property and equipment-net . . .. .. . .. . ... . . $ 73,892,000 $ 76,324,000 $ 59,143,000 $ 62,891 ,000 $ 73,038,000 Total debt . ... . . . . .. . .. . .. . . . ... . .. ... . . . . $ 41 ,033,000 $ 50,269,000 $ 43,402,000 $ 50,496,000 $ 66,651 ,000 Retained earnings .. . . .. . .. .... .... .. . . . . . . $ 27,044,000 $ 20,086,000 $ 14,262,000 $ 6,726,000 $ 5,502,000 Stockholders' equity .. . . ... .... ... ..... .. . . $ 47,152,000 $ 40,611 ,000 $ 34,787,000 $ 27,192,000 $ 17,823,000 Shares outstanding . ..... . .. . .. . .. . . .. . .. . . 12,312,000 12,463,000 12,463,000 12,446,000 10,463,000 Book value per share . . . . . .... .. . .. . . ... . .. $3.83 $3.26 $2.79 $2.18 $1 .70 STATISTICS Passengers . . ... . ....... . . . . ... . . .. . . . ... 4,546,000 4,263,000 4,319,000 3,793,000 3,753,000 Passenger miles (000) . . . .. . ... .. . . . . ... . ... 1,061 ,000 1,012,000 1,029,000 866,000 806,000 Available seat miles (000) . .. . . . . . .. . . .. ... . . 2,151 ,000 2,139,000 2,048,000 1,961 ,000 1,810,000 Passenger load factor ...... ... . ... ..... . . .. 49.3% 47.3% 50.3% 44.2% 44.5% Cargo ton miles .. .. . . ... ... .. . . . ... . . . .. . . 12,585,000 13,394,000 12,180,000 9,473,000 10,985,000 Revenue plane miles . . ... . ... . ... . .... .. ... 29,055,000 29,422,000 29,200,000 28,204,000 26,693,000 Number of employees . . . ... . . . ... . . . . . . . ... 3,360 3,250 3,120 3,020 3,150 19 20 communications A dramatic advertising campaign introduced North Central's " Explorer's bill of fare" food service. Full-page newspaper advertisements in color highlighted the new cuisine now being offered on long-haul nonstop flights. This exclusive culinary adventure features savory dishes from around the world. Portuguese specialties were used first in this series of uniquely prepared foods. The ad text carried the various menus, along with flight schedules and special tour packages. The impact was particularly noticeable in the Denver-Minneapolis/St. Paul market, where traffic increased 15 percent in 1974. Another major advertising theme, " Get up on Cloud Nine", encouraged passengers to try North Central's DC-9 custom-jet service. This series promotes the three-and-two seating with fold-down center seat and complimentary meals on selected flights at regular coach fares. Passengers were told of savings, through " interline" joint fares, when they start a trip on North Central and then transfer to another carrier. Popular give-away items, such as the "Frostbite Kit" and Ski Tips brochure, were again available, and a Fishing Tips booklet with a lure was added for travelers to major summer vacation spots. A new skiing film was produced for groups interested in winter fun on the slopes and shown extensively. For the third consecutive year, reduced- rate "Broadway Show" tours were offered to New York travelers who fly North Central. Media emphasis is reflected by audience figures. Advertising reached an estimated 8.1 million newspaper readers, 7.1 million television viewers, 4.4 million radio listeners and 1.5 million magazine subscribers. Ads in the different media are coordinated to reinforce each specific campaign. The financial public relations program, expanded when the com- pany was listed on the New York Stock Exchange in 1973, is continuing. Company officers periodically address major security analyst groups around the country about the airline's achievements and current news. Stories are regularly carried in The Wall Street Journal and on the Dow Jones and Reuters wire services. Communications with stockholders included distribution of the 1973 Annual Report-selected by Financial World for an award in its industry class-and quarterly statements. Some 50 news releases reported financial results, traffic records and other North Central developments to media outlets. About 12,000 com- pany history booklets, aircraft information sheets, and DC-9 postcards are given away annually. Sales people made nearly 25,000 personal calls on principal industrial accounts and travel agencies over the airline's 13-state area and Canada. North Central personnel participated in 800 meetings with civic, industry, and special interest groups. The Northliner Museum at the General Office officially opened in June 1974 and has already attracted more than 1,000 guests. Nearly 4,000 people, ranging from grade school children to adults, took conducted tours through the airline's facilities. Another public relations activity brought over 9,000 Twin Cities resi- dents to the company's headquarters. good people make :airline great These visitors, who attended public functions in the cafeteria, saw part of the airline's operation and were introduced to food service from the North Central Flight Kitchen. Company people at other cities around the system also hosted groups interested in aviation. Aboard the aircraft, the Northliner Magazine and the Northliner Gifts catalog are carried in each seat pocket. The 32-page magazine has entertaining articles about areas served by North Central and some phase of the airline's operation, as well as stories on travel and busi- ness. The catalog offers merchandise of interest to passengers, and many items carry the company name and mallard duck insignia. The Northliner newspaper, judged in 1974 as the top paper published for regional airline employees, keeps personnel informed of company news on a monthly basis. Memos and bulletin board announcements provide interim communications. Corporate officers personally meet with employees at each station for an informal visit at least once a year. As in the past, North Central receives additional support and publicity from many individuals and organizations. This invaluable assistance contributes measurably to the company's progress and is greatly appreciated. rllWICW.WDU He. of" lndusfr)' .\n.anl ....... "'_ .......... 1973 Annual Report and The Northliner newspaper received awards. The Northliner Museum opened at the airline's headquarters. GYours only on North Central nonstop to Minneapolis/St. Paul Exotic foods gathered from around the world, menus and recipes from internationally renowned restaurants and hotels. Our Explorer's Bill of Fare puts world-famous foods right in front of you on our evening nonstop to Minneapolis/ St. Paul. Right now, feast on Lombo De Vaca Com Yinho De Madeira (tenderloin steak with Madeira wine) from the Hotel Savoy of Madeira, Portugal. Or Peito De Frango A Portuguesa (chicken breast Portuguese style). Sip complimentary Isabel Rose wine. Relax just as you would on board TAP, the intercontinental airline of Portugal ... where you eat like this all the time. In short, sit back and enjoy one of the four different Portuguese menus we rotate on our 7:00 p.m. nonstop to Minneapolis/ St. Paul. Hearty Breakfast EYE-OPENER (A 16-oz Bloody Mary or Screwdriver ava1 lablc} BLUEBERRY PANCAKES AND SAUSAGE CHEESE OMELET AND SAUSAGE SCRAMBLED EGGS AND SAUSAGE FRENCH TOAST AND SAUSAGE (Above menus rotate on our mommg night) All Breakfasts Include Juice, Fruit Cup. Muffin or Sweet Roll. Coffee Magellan Wine Basket HOT HAM & CHEESE SANDWICH REUBEN SANDWICH CHEESEBURGER HOT PASTRAMI SANDWICH SMOKED TURKEY ON DELI ROLL (Above menus rotate on our luncheon flight) All Luncheons Include Cheese, Fresh Fruit, Complimentary Rose Wine A Taste of Portugal ALCATRA A MODA DA MADEIRA (S1cak Madeira S1ylc) LOMBO DE VACA COM V(NHO DE MADEIRA (Tenderloin Steak w11 h Madeira Wine) PEITO DE FRANGO A PORTUGUESA (Chicken Breast Portuguese Style) ESPETADA (Shish J:(ebabl (Above menus rotate on our evening night) All Oinn~rs Include Salad. Vcge1ablc. Ho1 Rolls and Butter. Dessert and CoHce Call 398-5566 or your travel agent. Nonstop to Minneapolis/St. Paul 9:00 a. m. 1:55 p.m. 7:00 p.m. good people ;m ~ - ~ AIRLINES .._ NORTH CENTRAL AIRLINES, INC. 7500 NORTHLINER DRIVE MINNEAPOLIS, MINNESOTA 55450